British Economic Growth in the Steam Age: Some Lessons for Today

1
British Economic Growth in the Steam Age Some
Lessons for Today

• Nick Crafts
• University of Warwick

2
General Purpose Technologies (Lipsey et al, 1998)

• Over time are found to have many uses and
  complementarities are pervasive
• Initially have much scope for improvement
• Eventually come to be widely used and lead to
  (large) rise in aggregate productivity growth
• BUT
• Initially may have no positive impact on growth
  or even imply a slowdown phase

3
The Solow Productivity Paradox

• You can see the computer age everywhere except in
  the productivity statistics
• Robert Solow, 1987

4
Steam as a General Purpose Technology

• Steam Engines, Railways, Steamships
• James Watts Invention 1769
• Liverpool Manchester Railway 1830
• Steamship crosses the Atlantic 1838

5
Sources of Power, 1760-1907 (Thousand Horsepower)
1760 1800 1830 1870 1907

Steam 5 35 165 2060 9659
Water 70 120 165 230 178
Wind 10 15 20 10 5

Total 85 170 350 2300 9842
6
Steam Engine Technology

• Took a long time to become cost effective in most
  sectors
• Coal consumption per hp per hour fell from 30 lb
  pre-Watt to 12.5 lb for Watt engine to 2 lb by
  1900 when psi reached 200 compared with 6 in 1770
• The big breakthrough was not James Watt but the
  move to the high pressure steam engine after 1850

7
Capital Cost and Annual Cost per Steam Horsepower
per year ( current)
Capital Cost Annual Cost
1760 42 33.5
1800 56 20.4
1830 60 20.4
1850 37 13.4
1870 25 8.0
1910 15 4.0
Note the estimates are for a benchmark textile
mill in a low coal cost region like Manchester
8
Total Steam Contribution to Growth of Labour
Productivity ( per year)
9
Implications

• Small contribution of steam pre-1830 helps
  explain Crafts-Harley view of industrial
  revolution
• Strong contribution of steam power in second half
  of 19th century says climacteric not explained by
  hiatus between GPTs
• Puts Solow Paradox into perspective

10
ICT Contribution to US Labour Productivity Growth
( points per year)
11
The Progress of ComputingReal Cost MIPS-E (1998)
12
Impact of GPTs on Growth

• ICT much bigger impact on American growth in
  recent past than steam ever had on UK growth
• Costs of computing have fallen much faster than
  did costs of steam power
• Society seems to be getting better at exploiting
  GPTs more rapidly

13
Railway Capital Authorised (mn)
14
Railway Share Prices (June 1840100)
15
RAILWAY BENEFITS
16
RATES OF RETURN

• Average private rate of return 5, 1830-70
• Average social rate of return 15, 1830-70

17
Lessons from Railways

• Railway mania ended in tears
• Profits from railways less than optimists had
  hoped
• Users gained much more than investors

18
Does Innovation Generate Supernormal Profits?
(Nordhaus, 2004)

• Innovators capture about 2 of the total social
  gain from technological progress
• Appropriability is low (7) and depreciation is
  high (20 per year)
• The US stock market valuation of new economy
  firms grew between 1995 and 2000 at a rate that
  implied owners could capture 90 of the social
  gain

19
NASDAQ Composite Index
20
The New Economy and Stock Prices

• It was a bubble but fundamentals (trend growth)
  had improved
• Dot.coms experience would not have surprised
  someone who lived through the 1840s
• Economic gains from ICT not a mirage but few of
  them will be reaped by investors

21
Globalization

• Enhanced integration of international markets
• Promoted by reductions in transport and
  communications costs .. both steam and ICT do
  this
• But is the effect to centralize or disperse
  economic activity?...to promote divergence or
  convergence?

22
Transport/Communication Costs

• VERY HIGH activity is dispersed
• VERY LOW activity is dispersed
• INTERMEDIATE agglomeration with feedback
  effects based on large markets and linkages

23
Agglomeration Benefits

• External economies of scale
• Productivity rises with city size
• Proximity to customers and suppliers
• Thick labour market
• Still very important and cannot easily be
  replicated

24
Steam Power and Industrial Location

• Reduced transport costs for goods rather than
  services both on land and at sea
• Industry moved closer to natural resources
• Manufacturing cities proliferated in Europe and
  North America
• Centralizing not dispersing

25
Real Cost of Ocean Shipping(1910 100)
26
Steam-Powered Globalization

• Helped manufacturing and finance
• Hurt arable agriculture, especially land rents
• Lancashire cotton textiles enjoyed an Indian
  summer

27
Wheat Prices
England and Wales (Sh/d per quarter) Ratio of Liverpool/Chicago
1852/6 62/1 2.00
1868/72 54/8 1.49
1895/9 27/10 1.26
1910/3 32/5 1.06
28
Lancashire Textiles and Globalization (Leunig,
2005)

• Lancashire a high wage industry (6 x India and
  Japan in 1910)
• But continued to dominate world trade (60 world
  market share in 1910)
• Unit costs no higher than in India or Japan even
  before adjusting for quality
• Lancashire flourished because of agglomeration
  benefits (productivity 33 higher than rest of
  Britain)

29
Regional GDP/Head (GB 100)(Crafts, 2005)
1871 1911
London 147.3 165.6
Rest SE 88.5 86.3
East Anglia 92.0 76.8
North West 108.1 97.2
Yorks Humbs 94.4 89.5
Wales 87.7 90.1
30
Coefficient of Variation of Regional GDP/Person
31
Globalization and the Regions

• Both then and now regional income inequality
  rises with globalization
• London then and Greater London now prosper
  while imports hurt the provinces
• East Anglia suffered in 19th century and West
  Midlands in 20th century

32
London as a Financial Centre

• Agglomeration where size matters
• Benefits from thick labour markets and importance
  of proximity for deal-making
• Clerical jobs will increasingly be offshored
• This will strengthen the core business

33
UK Asset Management Core BusinessOXERA (2005)
Importance Score
Financial Infrastructure 4.00 3.96
Size of Labour Pool 3.96 4.24
Quality of Life 3.77 3.36
Market Liquidity 3.69 4.29
Regulatory Regime 3.69 3.40
34
UK Asset Management Back-OfficeOXERA (2005)
Importance Score
Total Labour Cost 4.00 2.74
Size of Labour Pool 3.92 4.08
Flexibility of Labour Market 3.89 3.22
Property Rentals 3.59 2.11
Financial Infrastructure 3.42 3.85
35
Death of Distance

• Greatly exaggerated
• ICT enables some things to go to the periphery
  but enhances the strengths of the core at the
  same time (e.g. strengthens London as a financial
  centre)
• Like steam, ICT rearranges geography but doesnt
  abolish it
• Globalization requires sectoral and spatial
  adjustment

36
Did Victorian Britain Fail ?

• Choices of technique basically correct
• Foreign investment profitable
• Emulation of USA not feasible
• Natural resources, economies of scale,
  non-universal technology not a neoclassical
  world
• New growth economics and new economic geography
  complicate the argument

37
Pre-1914 Globalization

• Driven by falling transport and communication
  costs
• Protectionism increasing in product markets and
  USA a high tariff country
• Massive international factor flows
• BOTH capital and labor go from Old World to New
  World

38
Anglo-American Wage Gap Contributions to
Change, 1870-1913 (ORourke, 1996)
39
Why No Wage Convergence ?

• TFP gaps increase because of British
  incompetence
• USA develops its own non-transferable technology
• USA benefits from increasing returns to scale and
  agglomeration economies sustained by migration

40
North Atlantic Economy

• Heckscher-Ohlin
• US comparative advantage from land abundance
  remains in agriculture
• Tariffs imply less trade and more migration

• New Geography
• Migration and increasing returns virtuous circle
  of industrialization plus manufactured exports
• Tariffs imply more migration and promote switch
  in comparative advantage

41
American Overtaking of Britain

• Best understood in the context of globalization
• Reveals some limitations of neoclassical
  economics
• May have no important policy implications